The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

Chile

October 11, 2013

Juan Linz has gotten a lot of well-deserved attention in the
blogosphere recently. Linz wrote that presidential regimes tend to break down
because of irreconciliable conflicts between the executive and the legislature.

Many observers, not least Matt Yglesias, have interpreted
Linz as stating that the problem is that presidential system allow for gridlock
between the executive and the legislature, especially when the parties are
ideologically coherent and commited. Kind of like, uh, the modern United
States. So are we doomed now that our parties have become European-style
organizations?

Well, maybe. The cross-country
data is mildly supportive of the presidentialism = bad hypotesis, but is by no
means a slam-dunk. Moreover, while presidential regimes are more likely to
break down there is really rather little evidence that the reason was gridlock
between the executive and the legislature.

The closest parallel to the current American situation is
Chile in the early 1970s — but it is not very close. In the 1969 election,
the People’s Union (Unidad Popular) got 60 out of 150 seats in the lower house. The
Christian Democrats got 57 and the National Party received 33. The next year, Salvador Allende (the People’s Union candidate) won a
plurality of the presidential vote, throwing the election to Congress, where he
won with Christian Democratic support. (The Nixon Administration tried to
prevent his election but failed.) Allende started a program of widespread
nationalizations using existing legal authority under a 1932 law that allowed
for the temporary requisition of basic goods when in the public interest. (The
law also allowed the executive to put companies into temporary receivership
should they be closed by a strike.) In October 1972, the Supreme Court ordered
the President to obey lower-court orders overturning some of the
nationalizations; Allende refused.

In March 1973, the opposition won the Congressional
elections. The Christian Democrats aligned with the National Party to form the
Democratic Confederation, which took 55.6% of the popular vote and 87 out of
150 seats. (The People’s Union got the rest.) Congress first attempted to amend
the constitution, which failed. It then tried to impeach Allende, but could not
get the requisite ⅔ majority. In May, the Supreme Court again reprimanded the
President. At this point, Congress went on record asking for a coup. The coup happened on September 11, and its
leaders proceeded to disband Congress and jail or “disappear” many of the
legislators who had called on the military.

In short, the Chilean crisis was caused by a President who
overstepped his authority and disobeyed the Supreme Court and resolved by a
military that believed itself above the law. Suffice it to say that this does
not characterize America’s current situation.

What about Argentina? Well, Argentina has had a lot of
coups since the first one in 1930. In 1930, President Hipólito Yrigoyen’s party had comfortable majorities in both houses. The 1943 coup was against a dictatorship. The 1955 coup overthrew the elected Juan
Perón — but Perón’s party controlled Congress by overwhelming margins. As in 1930, gridlock
was not the issue. In 1962, the miltary overthrew President Arturo Frondizi: in
that case, the prompt was Frondizi’s loss of several governorships to the
Peronists in the ’62 elections. Again, gridlock was not the issue. The 1966
coup kinda sorta maybe if you squint could be gridlock-related — but really had
more to do with President Arturo Illia’s confrontation with American oil
companies. And 1976? That one was against
President Isabel Perón’s supposed inability to defeat Communist guerrillas. Her
coalition controlled Congress; once again, gridlock was not the issue.

What about Brazil? Well, the Revolution of 1930 took down an
oligarchical government with an extremely limited electorate. Not really
comparable. The 1964 coup knocked out a left-wing government with American
support. It is true that Congress did not support President João Goulart. It is also true, however, that for his first three years Goulart presided over a
parliamentary system in which power resided with Prime Minister Tancredo
Neves. In 1963, a referendum restored President Goulart’s executive power: the
result was paralysis. In that sense, the ’64 democratic breakdown is consistent
with the hypothesis that presidentialism causes gridlock causes democratic failure.
The problem is that the parliamentary system tried beforehand was doing no
better at resolving the country’s political conflicts.

Colombia? Well, the 1953 coup happened after President
Laureano Gómez seized dictatorial power. Gómez, in turn, won the 1950 election
because the opposition boycotted it. Again, gridlock not the problem.

Let’s turn then to Mexico. Uh … no, let’s not. The 1910
revolution got started against a dictatorship. Porfirio Díaz government was
many things, but gridlocked was not one of them. (In fact, Congressional votes
were all unanimous after 1893.)

I could go on around the other countries of the Western Hemisphere,
but the pattern is similar. Divided government is not the cause of most democratic
breakdowns in Latin America.
Chile 1973 is the closest, but that is one event, with little resemblance to the
government-by-crisis currently affecting the United States.

So breathe easy
America! We will get through this. How, you ask? Well, if the GOP keeps this up,
it will lose a lot of elections, even with our gerrymandered House of
Representatives ... and there is a lot of ruin in the United States. The
worst-case scenario on the debt ceiling is pretty bad, and I would certainly
a 5-10% fall in GDP and the corresponding human suffering a failure of the United States. But in the unlikely event that the
Republicans take us there, they will not be in a position to take us there
again.

March 05, 2010

I think that Tyler Cowen makes a surprising mistake here when he compares the lawlessness in Chile and Haiti. Cowen: “Haiti, on the other hand, remains fairly orderly and there have been reports that police corruption has gone down significantly ... Haiti is so orderly because a) looters would be killed on the spot, and b) the entire fate of the nation is at stake and thus every small event is taken very seriously.” He links to a CNN story and a tweet from somebody in Santiago reporting secondhand about Concepción. (God, I hate Twitter.)

I dispute the stylized fact. I am peripherally involved with (well, hearing about) a U.N. survey design in Port-au-Prince: the lawlessness is out of control. Kidnappings, assaults, and rapes are endemic. Concepción, on the other hand, has a looted shopping center. These are not the same thing!

Haiti seems orderly because expectations were much worse. Chile seems chaotic because expectations ... well, actually, Chile doesn’t seem that chaotic, given the scale of the disaster. More chaotic than it needed to be, but the state functions and there has been no organized violence. Minute-to-minute reports here.

The post perturbs me a bit, since I know many people who rely on Marginal Revolution for information, and I am afraid that the false comparison is going to mislead some of them. It is also a bit ironic, since the main point of the post was “context-dependence, context-dependence, context-dependence.”

Yes. Context-dependence. By any absolute standard, Haitians reacted far more violently than Chileans to the earthquake, because the destruction was far greater and the state basically collapsed, even if it is now getting back on its feet. Apples and oranges, context-dependence.

March 01, 2010

I have many reasons to like Chile to the point of taking out dual citizenship. Democratic government, great climate, good music, nice roads, and a flag that reminds me of what is still my favorite country on the planet. (You know, the one that got the silver in men’s and women’s hockey.) And to all that you can add a sensible response to looting after a natural disaster.

“A day earlier in Concepción, the police fired water cannons and tear gas to disperse hundreds of people who forced their way into shuttered shops. But law enforcement authorities, heeding the cries of residents that they lacked food and water, eventually settled on a system that allowed staples to be taken but not televisions and other electronic goods. Ms. Bachelet later announced that the government had reached a deal with supermarket chains to give away food to needy residents.”

The issue he raised is a real one, but Chile should not be impugned, when in fact the government is responding with alacrity and good sense. ¡Felicidades! ¡Viva Chile! Take it back, Matt! Chile awaits an apology.

February 27, 2010

I’ve checked, and everyone I know in Santiago seems to be all right. The earthquake has been incredibly severe, but the state is responding.

Here is a brief overview of what we know about the economics of natural disasters. Here is another paper by one of my favorite economists. (He has been really helpful to Kris and I in our ongoing work on Crown Agents.) Yang’s paper looks at hurricanes, not earthquakes, and finds something interesting: in very poor countries, foreign aid plus increased remittances helps recovery along. In richer countries, however, increased inflows from abroad are more than offset by huge declines in private investment. Paradoxically, richer countries take longer to recover than poorer ones. (Places like Puerto Rico and Martinique are not in his sample; I doubt that the result would apply to places that are parts of larger political units.)

Then again, there is economic recovery and there is death and destruction. These are very different. So even if it is the case that richer nations take longer to recover from natural disasters, far fewer of their citizens are likely to die. Moreover, citizens of functioning democracies are also more likely to make it through, even after adjusting for income.

Chile is both relatively rich and a functioning democracy. Today is a nightmare; but nothing along the lines of what is going on in Haiti.

American Airlines, I should say, is running flights for relief workers out of both Miami and Fort Lauderdale. Kudos.

January 10, 2010

The New York Times has an article today entitled, “Neighbors Challenge Energy Aims in Bolivia.” It is quite informative. But it gives the wrong impression about the effects of Bolivia’s energy policy under Evo Morales. The article makes it seem as though Bolivia shot itself in the foot by nationalizing the gas. That is probably not true. Rather, Bolivia has shot itself in the foot by refusing to build a pipeline to Chile.

Argentina’s energy policy has nothing to do with Evo. In fact, inasmuch as Argentina has a coherent energy policy, it currently revolves around importing more Bolivian natural gas. Its roots lie in the peso devaluation of January 2002. The government froze the peso-price of natural gas, in order to protect Argentine consumers who were already suffering an economic downturn considerably worse than the Great Depression. The effect was to knock down the residential gas price from $1.88 to 66¢ per MMBTU.

That wasn’t a problem until the southern hemisphere winter of 2004, when gas companies cut supplies to large industrial customers. After all, they could get much higher prices from exporting the gas to Chile. Well, the Kirchner administration reacted much as you’d expect: they banned gas exports. The Interior Minister of Argentina apologized to the Chilean government for the interruptions — but in May 2005 the Argentines once again slashed exports to Chile. The story repeated itself in 2006, when Argentina cut exports altogether for two weeks. In fact, Buenos Aires added insult to injury when the government raised export taxes from 20% to 45%.

Eventually, however, as the economy recovered, Argentina stopped being an exporter. So the Fernández administration began to walk back the policy. First, she allowed prices to rise to around $2.50 per MMBTU. Second, she created incentives to increase the domestic supply. Finally, she moved to try to lock-in relatively low gas prices from Bolivia. Argentina imports LNG, but it costs twice as much as Bolivian gas. The country’s LNG terminal offers a useful hedge against any Bolivian attempts to renegotiate the contract, but both parties would prefer to buy Bolivian gas for $5 instead of Trinidadian gas at $10. (In fact, the terminal goes unused for long periods.)

What about Brazil? Well, what about Brazil? It is true that the nationalization provided some impetus for the country to become self-sufficient, but less than you might think. First, the Brazilians pushed back hard, even threatening to dismember Bolivia if it messed with the price or volume terms of the contract. And Brazil won. So while Petrobras may have been disillusioned, the situation worked out well from Brazil’s point of view.

In fact, Brasilia had a good reason to want to allow Bolivia to retain more of the rents from resources, as long as Brazilian consumers weren’t affected. Simply put, the bet was that a wealthier Bolivian government would result in a more stable Bolivia, and it’s politically easier for Brasilia to aid La Paz by resisting pressure to defend Petrobras profits than it would be to write checks. The logic is identical to that behind the 2009 renegotiation of the Paraguayan hydropower contract — the primary difference being that since Brazil initiated the hydropower deal, it has been able to extract more political benefits from Asunción than it has been able to receive from La Paz.

Now, many people in Brazil say that Petrobras is upping domestic production in response to Bolivia’s tax hike. It may even be true. But we don’t know! Domestic exploration was good business with or without Evo Morales. The increase in Bolivia’s government take made it more so, but we don’t have the numbers to say that domestic supply would not have increased regardless. I’m not faulting the article; it’s a subtle point. I am faulting them for getting Argentina backwards ... but with Brazil, we just don’t know if Evo really mattered.

Chile is where the article is spot on. After Argentina cut the taps, the Chilean government attempted to strike an agreement to build a pipeline from Bolivia, but the negotiations ignited a firestorm in Bolivia. The anger surged over the fact that the pipeline would pass through territory that Chile had seized from Bolivia in 1878. Horrors! The Chilean government periodically floated a trial balloon of transferring a strip of land along the Peruvian border to Bolivia, but Lima protested, since Chile’s far far north had been originally seized from Peru.

Nobody in Peru seriously contested the border ... but accepting a century-old annexation and allowing the annexed land to be transferred to a third country were very different things. After a brief and goofy Bolivian flirtation with the idea of building an underground pipeline that would surface far out to sea, the idea died. And thus Bolivia lost a natural market, and whatever possibility it had of producing LNG.

The article makes no effort — not that it should! — to produce a cost-benefit analysis of Bolivan policy for Bolivia. The country lost opportunities in Chile and it may have lost opportunities in Brazil ... but it got a lot more revenue at a politically-dicey time. That, I have to say, is not nothing.

June 21, 2009

I temporarily moved to Santiago in late 1991. For the first few months, I had a room in a house owned by an elderly couple way out in upscale suburb called Las Condes, beyond the end of the metro. (There were only two metro lines.) Back then, it was a neighborhood of single and double-family homes. Apoquindo Avenue was essentially a suburban strip, densely built-up by American standards, with the occasional high-rise and pedestrian-friendly sidewalks, but a suburban strip nonetheless.

I wouldn't've recognized the neighborhood (since I couldn't remember the name of the damned cross-street to save my life) if it hadn't been for the minor miracle that the Pizza Hut on the corner of Apoquindo and Capitanía was still there. But I remembered the house was on Nevería, a block from the street that hit Apoquindo at the Pizza Hut, and with the cross-street I could locate it. So I went looking. And what did I find? Big apartment buildings!

Could that kind of change happen in America? I have my doubts. In my last post, I briefly discussed the high cost of American zoning laws. Such laws prevent wholescale changes in land use, causing cities to sprawl more than they would have otherwise. In other words, they lock in the existing pattern of land use, preventing the kind of wholescale change that in past decades gave us such delights as the boulevards of Queens and Wilshire, where high-rise corridors sprouted along formerly suburban strips. Today, I don't know if that happens at all, with the exception of a few downtown districts. When densification pressure starts in an American neighborhood characterized by single-family homes, zoning changes usually squash it, the way New York City has moved to protect the pristine environment of Queens from an onslaught of apartments. Let alone, say, the Bay Area. Imagine Palo Alto filled with high-rises and three times the population.

June 14, 2009

So I line up a trip to the deep-pit copper mine. Chido! At which it point it starts to hail around here, and the company cancels. (Liability issues. Chile is not Mexico, it seems.) So I figure, hey, Chile has restarted passenger train service, why not chill in Chillán? Metro to the train station, thin attractive woman a little older than me and wearing this cute little neo-hippy snoopy hat sells me a ticket with just the right amount small talk to remind me why I like this country so much. Only ... she realizes that the return trips are all sold out. I debate taking the bus back, decide no, and now regret it. WTF am I going to do in Santiago on a rainy lazy Sunday? Work in my hotel room? Too depressing!

I'll figure something out. Meanwhile, Doug Muir is in Senegal, with details here and here. I, of course, am fascinated by the French influence. As always, don't expect pictures from Mr. Muir, but do expect lots of information, historical detail, and very good analysis about what it all means.

You can also go here and here on this blog, where we discuss another part of the French not-empire in West Africa, or here, where you find out how Burundi got a handle on infectious disease.

I'll be back with more about regional inequality, copper, and the effect of the Panama Canal on Chile, but right now I'm going to go brave the rain and wander aimlessly around Santiago for a while. I will, however, take requests for any Chile-related topics you might want to know more about. (Randy has one pending on regional inequality.) Hasta pronto, mis cuates desconocidos.

June 07, 2009

In 1991, when I was last in Chile, the military was a thing apart. Its rule over the country had only ended three years before. The Constitution of 1980 reserved it a special role. There was an organization called the National Security Council that consisted of the president, the heads of the Senate and Supreme Court, and the commanders of the four branches of the military. The NSC could determine its own decision-making functions. It selected four out of 36 senators, not including the seat reserved for Augusto Pinochet. It picked two out of seven members of the Supreme Court. The president couldn't remove military commanders without its approval. If it saw “the menace of war,” it could order the central bank to extend credits to any person or group that it saw fit. In addition, albeit not part of the constitution, a 1954 law granted the military 10 percent of Codelco’s copper revenues. It was all very undemocratic, save for one thing: the armed forces relied on conscription, and had since 1900. The annual take, however, was never more than 20 percent. In effect, it was fairly random and easily avoided, which undercut any chance that the military might become a citizen army.

Most of that has now changed. The NSC is now just an advisory board, and the non-elected senators are a thing of the past. The military continues to get its share of Codelco revenues, but tensions with the neighbors are very low, and civilians set policy. And ... perhaps inevitably ... conscription has ... well ... not quite ended ... it’s weird, and it raises a lot of interesting questions for the United States and elsewhere.

May 02, 2009

The last time I was in Santiago de Chile was in 1991. It was a bad year. The First Gulf War ended in February. The U.S. economy was in the toilet. Unable to afford school fees, saddled with a large short-term debt dumped on me due to a bit of ... ah ... creative financing by a ... hmm ... unrelated family member, and needing to save to pay for my long-anticipated trip to South America, I stopped out of school and wound up doing odd jobs that paid enough to keep me sleeping in my car. Which was a 1980 Plymouth Champ. If Marcia still comes here, she can probably say more about this period than I remember. Or necessarily want to.

It wasn't the greatest time to decide to go gallivanting off to Santiago, but I managed to get enough money together enough to go. I don't remember a whole lot. I have a journal from the period, but the young fellow who wrote in it seems quite alien. (At some point around 1995 the writer becomes a recognizable version of me. Stupider and ignorant, but clearly me. Before that ... who was that guy??)

So now it turns out that I'll be headed back to Santiago for a few days next month. It will be interesting to see all the changes. In that vein, I'm going to begin an intermittent series of posts about Chile, starting with the following chart (you can click on it to have an expanded version pop up):

It shows the PPP-adjusted GDP per worker (in 2000 dollars) for the United States and Chile between 1950 and 2008. The data come from the Penn World Tables through 2003; afterwards, the U.S. data are from the Global Financial Statistics database (dividing real GDP by total employment) while the Chilean figures are derived from the Instituto Nacional de Estadísticas, under the somewhat heroic assumption that the growth in Chilean GDP per worker in 2004 pesos is the same as its growth in PPP-adjusted 2000 dollars. Anyway, the approximation is good enough for a blog post, and unlikely to change this picture much. (Besides which, I know how the PWT figures are produced, and they're not much more accurate.)

The data show that Chile had an economy about half as productive as the United States at the middle of the last century. Chile more-or-less maintained that ratio until the economic collapse that hit at the tail end of the Allende presidency and the first few years of the Pinochet dictatorship. There was a rapid recovery afterwards, but the economy went right into another tailspin in 1982. The solid growth rates since then have only taken the country back up to the same relative position that it held at the end of World War 2.

That said, the place is lot richer than it was when I was there in 1991. Your average Chilean worker produces more than half again as much as he or she produced back then. But what does that mean on the ground?

Right about now, Doug would probably turn to the human development indices. Infant mortality, life expectancy, income equality, that sort of thing. Me, I make like Gary Numan and look at cars. The following chart ...

But not all Argentine megaprojects are dead. The day before the riots in Castelar and Merlo, President Fernández declared her support for a 13-mile train tunnel through the Andes to Chile, at an estimated cost of US$3 billion. Unlike the Tren Bala, a cargo link between Chile and Argentina is an excellent idea. Most of the financing will be private, the current road link (which I've driven) is clearly inadequate, and the economic benefits are clear. It won't be as cool as a bullet train, but it will help generate jobs and raise incomes.

Plus, the Buenos Aires rail system desperately needs to be fixed. Upgrading commuter rail isn't a marginal wouldn't-it-be-nice project, the way it would be in New York or the Netherlands. Rather, upgrading commuter rail is something absolutely necessary if Buenos Aires is to remain a functioning metropolis in the future.

So while I don't generally approve of burning public property, sacking offices, or overturning cars, this particular angry outburst may have done the country some good.

May 09, 2008

On March 1st, 2005, President Nestor Kirchner effectively repudiated Argentina's obligations to those bondholders who refused its final offer to restructure its debts.

Four years earlier, during the chaotic month of December 2001, Argentina defaulted on its dollar-debts. Over that evil month, the economy was reduced to barter, mobs sacked bank buildings, and the country went through five presidents in eleven days ... starting with the unlucky fellow in the blue shirt, Fernando de la Rúa.

After President Néstor Kirchner took office in 2003, Argentina began negotiating over the debt in Dubai. The Argentine side did everything possible to flummox its creditors, up to and including bringing very scantily clad female “assistants” to meetings with high-ranking American women. The Argentine chief negotiator also played doornail dumb, honestly confusing the Americans and Italians across the table (unsurprisingly, the half-naked assistant ploy discomfitted the Americans rather more than the Italians) about whether he was uncannily brilliant or honestly didn't understand what a bond was. (I've met the man, and I don't know either.)

The Argentines put a truly fascinating offer on the table: the creditors would forgive past-due interest would be forgiven, and the old bonds would be swapped for new ones worth 35 cents on the dollar. In return, however, the new bonds would include a GDP “kicker.” The kicker — pronounced “keek-care” by everyone involved — promised the creditors additional payments equal to one-twentieth of the dollar value of all GDP growth above a initial threshold of 4.2% per year, which would eventually fall to one-twentieth of all growth over 3%.

The creditors rejected the offer, preferring a “haircut” of 40% on the face value of the debt, no interest-forgiveness, and no kicker. In response, Kirchner told them, and the IMF, and the U.S. Treasury, and eventually even President Fox of Mexico (don't ask), that the bondholders could take his haircut or drop dead. On March 1st, 2005, the president finally told the holdouts to drop dead, and repudiated their bonds.

Below my friend Aldo contemplates the question: was that the right thing to do?

A year ago, I would have unhesitatingingly answered, “Yes.” Now, I still think it was the right thing to do ... but I'm worried about what the Fernández Administration intends to do with its hard-won fiscal freedom. More below the fold.